The 80/20 Rule for Running a Successful Business

by Dr. Donald N. Sweet

The 80–20 rule, also known as the Pareto principle, or the law of the vital few, states that for many events, roughly 80% of the effects come from 20% of the causes.

Said another way, 80% of your profit typically comes from 20% of your customers.  Often 80% of quality problems come from 20% of the reasons for those problems.   And so on.

Vilfredo Pareto was an Italian engineer, sociologist, economist, political scientist, and philosopher. He introduced the concept of efficiency and helped develop the field of microeconomics.

The multi-talented Pareto observed that by focusing on the Vital Few, we can make the most difference. To that end, we need to set up systems that constantly look for those Vital Few. Be they customers, products, or problems, tending to the Vital Few, while discounting or ignoring the “trivial many,” can dramatically improve our businesses.

We find that for many people, a problem is a problem, an opportunity is an opportunity, and they should all be addressed.  We disagree.  The issue is that we only have scarce resources to apply to any problem or opportunity.  There is only so much that can be done effectively.  We much choose the vital few that get attention.

I worked with a quality system once that required us to categorize failures by root cause.  After gathering information it became quite clear which root cause was responsible for the most failures.  It is there that we first spent time and effort to make improvements.  We then moved on to the next highest number and so forth.  By the way, we used what was called a Pareto chart when looking at the failures.  This method allowed us to make large improvements in output quickly while improving customer satisfaction.  There were lots of “one off” failures that probably never got resolved because the cost/benefit was just not there.

The same concept and process works for priorities.  Many of us have a “to do list” of 30 some items.  Fewer of us prioritize them by the value they have to the organization.  Fewer of us yet work on only the top three until they are complete.  Imagine what we could really accomplish if we put the majority of our work day (even half our workday) on the three most important items.

We work with our clients to help them identify and debate what the most important things on which they should be expending resources.  They we help them (follow up with them) to ensure they are actually spending the time to get those items accomplished.  Sometimes we haven’t identified the right items and priorities need to change.  That okay.  More often its the discipline the needed to stay the course and not be distracted by some shining new object.

The process of hammering out the top priorities using Pareto’s 80/20 rule pays big dividends within a year.  We suggest every organization keeps this process at the core of its decision making.